Monday, August 31, 2009

Sri Lanka Inflation Slows, Providing Room to Cut Interest Rates

By Anusha Ondaatjie

Aug. 31 (Bloomberg) -- Sri Lanka’s inflation slowed in August, giving the central bank room to cut interest rates to stoke an economic revival after the end of the island’s three- decade civil war.

Consumer prices in the capital, Colombo, rose 0.9 percent from a year earlier after gaining 1.1 percent in July, the statistics agency said on its Web site today.

Central Bank Governor Nivard Cabraal, who predicts 2009 inflation at 5 percent, on Aug. 18 said there was still room to cut interest rates after three reductions earlier this year. The South Asian island’s $41 billion economy is on the “right track” and will strengthen in coming months, Cabraal said.

“It is important for borrowing costs to fall further for investment to pick up and the economy to take off,” said Danushka Samarasinghe, research manager at Asia Securities Ltd. in Colombo. “The central bank will look for further easing.”

The Central Bank of Sri Lanka on Aug. 18 kept interest rates at a three-year low, holding the reverse repurchase rate at 11 percent for a second straight month and maintaining the repurchase rate at 8.5 percent.

Cabraal last month said there was “space for interest rates to come down further,” helping the government reduce the budget deficit in accordance with a $2.6 billion International Monetary Fundloan agreement.

The central bank wants lenders to cut borrowing costs before it lowers its key rates further, Cabraal said Aug. 18.

The IMF’s aid package and improved investor confidence with the end of the civil war have helped attract foreign flows and eased local borrowing costs, the central bank said July 23.
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